MAY
29
2007

Profiting when Insiders Trade at Extremes in Stock Prices – Part 1


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Traders seeking an edge are always keeping an eye out for interesting insider trading activity in a particular stock. Taking this a step further, there are certain characteristics that can be identified to really “kick” things up a notch. In the following two episodes, I am going to discuss some of those catalysts, along with a few examples. Stocks mentioned: NYSE:LLL, NASD:SONE



Traders seeking an edge are always keeping an eye out for interesting insider trading activity in a particular stock. Taking this a step further, there are certain characteristics that can be identified to really “kick” things up a notch. As this information has become more widely available and easily accessible, many traders do not place nearly as much importance on the data as they should. That’s not to say that all the many filings spewed out each day or useful or meaningful to say the least. But, if you watch out for a few key factors to line up, you may find a catalyst with the potential to form a perfect storm that can lead to rather impressive short-term stock returns. In the following two episodes, I am going to discuss some of those catalysts, along with a few examples.

Now, just because the release of an insider filing may lead to a temporary price jump, that doesn’t mean the current price fully reflects the quality of the insider purchase (or purchases). Also remember that insiders are not buying their stock hoping to sell it just a few days later. They’re placing their money on the line because they believe their stock’s price is likely to appreciate significantly enough for them to risk allocating their personal capital. There are also other timing factors that may take effect. For example, what if an insider purchased stock a few days before the market drops several hundred points as it did back at the end of February. Does that invalidate the purchase? Highly doubtful. What it may do, however, is offer traders and investors an opportunity to purchase the stock at prices even lower than the insider himself managed to acquire. L-3 communications (NYSE:LLL) makes a good example of this when multiple directors all purchased several million dollars worth of the stock near all-time highs in the mid $80′s per share. [within the next two months or so, LLL traded above $95/share]

Stocks with insider trades near all-time highs certainly make a strong statement of confidence by those at the company who are “in the know”. It takes some serious cahones to put money on the line at such elevated price levels. It will also give you a big clue as to whether the stock will continue breaking out to even more new highs, or if it will fake out traders and begin a new downward trend. If these insider buys are combined with already high levels of short interest that may take many days to cover, it can lead to even greater potential moves. As the stock continues to make new highs, shorts remain in denial as to how high the stock can go until their wallets can take it no longer. S1 Corporation (NASD:SONE) is a good example of this, with a short interest of over 7%. On May 11th, director Edward Terino bought 7,500 shares of SONE at $7.39, near 12 month highs. The trade was reported on May 14th, and price remained in the mid $7.50′s for several more days before finally thrusting above $8/share.

I didn’t want to overwhelm people too much in this episode, so be sure to tune in to part 2 of this series for even more insider trading tips. You can also begin scanning for your own potential insider trades using the free insider trading tools feeds we offer at “www.yourika.com/feeds” – they’re completely free and include all the information we described here!

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